Facebook's "Next Billion Dollar Business" Doesn't Stand A Chance

Cheer up, Sheryl, there will be plenty of other opportunities
<a href="http://www.flickr.com/photos/crossroads_foundation/4324554264/sizes/l/">Crossroads Foundation Photos</a>
Payments - Facebook's next billion dollar business - might not be Facebook's next billion dollar business, after all.

The social network with 700 million monthly users already generates about $4 billion a year in revenue and $2 billion EBIDTA.

BI: Last week, word broke that Facebook is going to start selling "Facebook Credits" over mobile devices and tablets. I perceived it as trying to cut Apple and iTunes out of the mobile gaming equation. Is there a pitched battle between those two in trying to be the one-click option for payments?

SS: Ultimately, what I think they're trying to do is reduce buying friction in the Facebook environment for their users, and "Facebook credits" is a way to do that.

So they, like everyone else in the industry, are seeing is that their environment, which used to be primarily browser-based is now mobile app-based, tablet-based. Consumers are accessing them through all these end points and they want them to be able to use the same type of currency for those transactions as well.

From my standpoint, what you see that as being is just them following their users to the places where their users want to interact. And they're just making themselves more available there.

Moreover, I think that's just a currency that works very well in their eco-system. If you look at the type of things that people buy in the social networks, whether its gaming or paying for other virtual goods, it's a great fit for those types of consumer needs. So I think that they're just making sure that wherever users choose to interact with them, they're making sure that they can do that.

BI: People who watch Facebook and talk about how it can add revenue say that they say should go beyond virtual goods and become an online store for actual items, but the pushback I always hear is "They don't want to do that in part because frauds is too difficult to police, which is why they rely on partners like PayPal." So tell me why fraud is such a big, hairy deal.

SS: I don't think, by the way, that it's just limited to fraud.

If you look at what's necessary for a payment system to be successful, there has to be something about it that's useful enough and different enough that both consumers and merchants say, "Hey, I wanna pay that way" and "hey, I wanna accept that form of payment."

In the case of PayPal we allow parties anywhere in the world to transact anywhere else in the world and accept payment methods from anywhere else in the world that they really couldn't do any other way. Merchants can attract customers that want to pay via PayPal.

That is actually the pre-condition for having a successful payments business, but even if you can manage that, you still have to deal with risk, which goes back to your point about fraud. We're talking about parties who aren't standing in front of you on the Internet, they're somewhere at a PC or a mobile device and they may be paying someone who's at a PC or a mobile device.

That's a different form of risk than most payment systems are used to managing, where you're standing in front of the cashier and someone is puling out a credit card, and oftentimes an ID to provide validation. So that in and of itself is unique, but I don't think, by any means, that it stops there.

BI: Why else won't Facebook get into the payments business?

SS: It's also about customer service. You're talking about moving money so if there's an issue with "Did I get the payment? /Did the payment go through? /I paid for this thing, where is it?" when that call comes, someone has to deal with it. And that, in and of itself, for web-based companies is not a part of their business.

BI: How many people does PayPal have on that problem?

SS: I don't have an exact number, but we literally have thousands…

BI: "Thousands," wow.

SS: Around the company yeah, in the aspects of managing a payment system and doing it effectively. And that, in my mind, is the real key when we talk about the payment industry and where it's going and who wants to be a participant.

BI: Because Facebook doesn't even have thousands of employees, period.

SS: Yeah, because actually the easiest part of being in the payments business is the actual processing of payments. Anyone frankly, as a merchant, has the ability to go to their banks and get the ability to take credit cards and process them from their customers, and keep those numbers on file.

But to be able to create a payments business and manage an entire payments ecosystem is an entirely different proposition than simply processing payments, and it is, quite simply about everything else. It's about managing risk, customer support, merchant acceptance, consumer adoption, and these are all things that in and of themselves are challenging enough individually, but to be able to solve them collectively is, I think, a real capability.